Markets & Finance

North Miami’s Condo Catastrophe

In 2002 the city of North Miami struck a deal with developer Michael Swerdlow to build a grand city-within-a-city called Biscayne Landing. Set on the largest available tract of waterfront property in South Florida, Biscayne Landing would feature 6,000 condos, many overlooking Biscayne Bay, along with shops, restaurants, nature trails, and a $10 million Olympic training facility. It would rival Aventura, North Miami’s elite neighbor just a few miles north, one of the wealthiest cities in Florida. Rents, taxes, and fees from Biscayne Bay would add $13 million a year to the city’s coffers.

Eight years after groundbreaking, Biscayne Landing represents some of the worst excesses of the housing bust—grandiose development plans, easy financing, and municipal overreach. The project consists of little more than two condo towers looming over a landfill. The sales office is closed, upkeep is sporadic. Sylvia Londono, a real estate agent and mother of two, says her condo, which she bought for $450,000 in 2007, is now worth $150,000. She has never moved in, she says, put off by the stench that rises from the site and a nearby sewage treatment plant on rainy days. “It has been the worst experience ever,” says Londono, who has organized a group of 60 fellow owners to petition lawmakers and the U.S. Housing and Urban Development Dept. to investigate the project. The department has declined.

Now the cash-strapped city of North Miami finds itself the reluctant landlord of the mixed-use project, having taken over the 190-acre property on Mar. 31. Credit Suisse (CS) is among the lenders that have lost money on the deal. North Miami is once again soliciting development plans for the site. “Look,” says Councilman Scott Galvin, the city’s point man on Biscayne Landing, “we can all Monday-morning quarterback this. We were all so enamored of condo real estate. There was no Plan B. Now we, the city, have to move with haste.”

The waterfront parcel has a haunted history. In the 1960s, North Miami designated it for a futuristic Pan American theme park called Interama that was never built. In 1971 the city contracted with a now-defunct firm called Munisport to build an Olympic-caliber sports complex. The city allowed Munisport to bring in clean construction debris to raise and shape the land for a golf course. At some point, Munisport started accepting municipal, medical, and toxic waste—so much that in 1982 the Environmental Protection Agency declared the development a Superfund site, having unearthed drums of chemicals and at least a dozen noxious gases, heavy metals, and other toxins.

An underground fire at the abandoned landfill burned for two months in 1990, sickening residents of an adjacent mobile home park. According to the federal government’s Agency for Toxic Substances and Disease Registry, the residents voiced concern that pollutants from the Superfund site were behind their rashes, respiratory illnesses, infections, and cluster of cancers, and complained that the EPA did not adequately monitor the abandoned dump. In 1999 the EPA took the site off its Superfund list, concluding that the biggest risk it posed was to marine life in Biscayne Bay. “It still needed cleaning up,” says Carol Keys, a lawyer who unsuccessfully ran for mayor of North Miami this year. “The water on the land was not and is still not fit for human contact.”

With the housing market picking up in 2001, North Miami solicited proposals for developing the site, ultimately signing the agreement with Michael Swerdlow’s Swerdlow Group, a commercial developer that had built the Great Mall of the Bay Area in Milpitas, Calif. By the January 2003 groundbreaking, Swerdlow had brought in condo specialist Boca Developers as partner in Biscayne Landing. While construction of the first two towers was under way, Swerdlow sold its interest to Boca in 2006, disagreeing with the partner’s plans to take on additional debt to build more high-rise condos. “It was a different time, and things were fairly crazy,” recalls Swerdlow Group President Brett Dill. “Michael and I were happy to leave and wish everybody good luck.” Boca Developers no longer exists.

Along with its other construction loans, Biscayne Landing secured $233 million in financing in 2007 from Credit Suisse, which got $163.5 million of that total from a commercial mortgage-backed security (CMBS) it sold to investors. “In hindsight, it’s easy to say that this was one of the more egregious examples of the commercial real estate bubble,” says Spencer Hollerith, an analyst with research firm Trepp, who has studied the CMBS behind Biscayne Landing. “But given the environment at the time, it doesn’t seem that extraordinary. … What is surprising to me is that a loan on undeveloped land even made it into a CMBS deal in the first place.” Credit Suisse declined to comment.

When the credit crisis struck in 2007, mortgage financing dried up, and many people who had agreed to buy units couldn’t close. When Boca didn’t make its loan payments, one of its lenders assumed ownership of Biscayne Landing. A year later, that lender walked away, and another took over. This year, rather than keeping up payments for taxes, fees, and maintenance, the lenders ceded control of the property to the city.

So what happens now? Councilman Galvin says Biscayne Landing is costing North Miami taxpayers around $100,000 a month to maintain. In June of last year, Miami-Dade County’s environmental regulator reminded the city that it must still install wells on the site to extract and dispose of contaminated groundwater. That and other remediation could cost more than $20 million. “The best thing that could be done for North Miami,” says area historian Seth Bramson, who has written books on the city, “would be to tear down the monstrosity and turn it into parkland.”

North Miami isn’t giving up. It has put out another request for proposals for the property, due July 16. Among the builders that have shown interest is Swerdlow, which is suggesting a combination of hotel, retail, residential space, and possibly even senior living. “We have such an extensive history with the site that we think we understand it better than anyone else,” says Dill.

Gary Poliakoff, an attorney representing Londono and other condo owners, is doubtful. “No matter the year, no matter the decade,” he says, “this site never becomes what is promised.”

The bottom line: After 50 years of failure, North Miami is still trying to create a successful development on a 190-acre site overlooking Biscayne Bay.

Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.